Embattled sugar producer Tongaat Hulett is pleased with its progress in dealing with a debt pile far in excess of its market value, with a weaker rand and robust SA sugar sales helping the group return to profit in the six months to end-September.
Tongaat, which was valued at about R1.4bn at Friday’s close, is battling to come back from a corporate scandal that prompted a collapse in the value of its shares and criminal charges against former executives.
Successful asset sales and an improved performance in SA sugar has kept the group’s turnaround on track, CEO Gavin Hudson said on Friday, despite volatile market conditions as a result of the Covid-19 pandemic. Tongaat’s biggest issue remains its debt, which brought it to the brink of business rescue, but the group is now in a position to start working on projects to diversify and add to growth, Hudson said.
Local market sales were buoyant, particularly over the lockdown period, the group said, with sales volumes increasing 24% to 246,130 tonnes in the six months to end-September. This was aided by wholesalers and retailers switching their private-label sugar to that produced in SA.
This could partially help Tongaat’s new commercial team, said Hudson, which had looked closely at the route to market for the group’s sugar and optimised it. In addition, SA’s sugar master plan had encouraged retailers to buy local, and the response to this had been good, he said.
Export sales volumes also surged by 103,802 tonnes to 147,628, benefiting from the weaker exchange rate as well as improved pricing, particularly in refined-sugar markets.
Group revenue grew 37% to R8.2bn to end-September, with headline earnings recording a sharp turnaround, rising to profit of R175m, from a loss of R315m previously.
Debt problems
Net debt fell 8.7% year on year to R10.9bn, while in SA, net debt decreased R636m to R10.37bn.
After its year-end, the group received R5.26bn in proceeds from the sale of its starch and glucose business to Barloworld. The group has used R4.64bn of this to pay down debt, having targeted an R8.1bn reduction by September 2021. On December 10, net debt stood at R6bn.
The group has largely wrapped up selling off noncore assets, said Hudson, while more money could be raised through land sales. Tongaat is one of SA’s largest commercial landowners, with land valued at about R11bn.
The group is “closer” to a rights issue, Hudson said, but this still depended on talks with lenders and what sort of capital structure the company would need.
Tongaat was once one of the country’s most recognisable blue-chip stocks, but an accounting scandal in 2019 left the group battling for survival.
An investigation by PwC into bookkeeping practices at Tongaat found the company had, among other things, overstated sugar sales and the value of assets. The company has launched a civil suit to recover bonuses and benefits of 10 executives it alleges played a role in the misleading financial statements, and has also filed criminal charges in SA and Zimbabwe.
Hudson said on Friday the Hawks had concluded their investigation and the case was expected to be handed over to the National Prosecuting Authority in early 2021, which would then make a decision on prosecutions.
Civil cases are expected to go to court by the end of 2021, he said.
Hudson said the group will have a strategic meeting in February to consider 19 possible projects that would help diversify the group’s operations and lead to growth.
These range from adding rice farming to the group’s operations in Mozambique, increasing Tongaat’s cattle herds and ethanol operations in Zimbabwe, and branching out into bioplastics.
The interim results showed Tongaat had made “huge strides” in putting itself on a more sustainable footing, even though there had been scepticism over their turnaround targets, said Kagiso Asset Management portfolio manager Dirk van Vlaanderen.
Beyond the debt reduction, the group’s cash generation was remarkable, given that Tongaat would normally absorb cash during the period due to the seasonal nature of the business, he said.
“More encouragingly, it is the reset of the cost base and refocus of Tongaat’s operating model, combined with a cultural shift to high performance, which is really starting to bear fruit,” Van Vlaanderen said.
Hudson and his team still had much to do to get the final asset disposals concluded so the company could pay down more debt and placate lenders, Van Vlaanderen said. “Given what has been achieved thus far, it seems unlikely they will stumble on the last hurdle.”
By Friday’s close, Tongaat’s share price was down 11.91% to R10.35, its biggest one-day fall since May. It is now down 21.65% so far in 2020, and has relinquished about 90% of its value over the past three years.
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